2017 Worldwide threat assessment – the rule of law is at risk

By Christine Duhaime | May 12th, 2017

The Office of the Director of National Intelligence released its annual Worldwide Threat Assessment on May 11, 2017, from the US Intelligence Community and compared to last year, there are many more international threats to world security.

The Threat Assessment from the US is a summary of all of the threats facing the US, and the world and is a roadmap on where countries and companies should devote resources to mitigate those threats.

Last year’s Report focussed on the connection between the refugee crisis, international terrorism and global instability, as well as on Iran, Russia, China, and artificial intelligence.

Here is a summary of the the most interesting parts of the 2017 Report:

Food Security – Rule of Law at Risk

The Report notes that there is a significant risk of large-scale, violent or regime-threatening instability and atrocities will remain elevated In 2017. Poor governance, weak national political institutions, economic inequality, and the rise of violent non-state actors will undermine countries’ abilities to uphold  their authority. In other words, the rule of law is at risk and in 2017, that will be evidenced by weak state capacity that will heighten the risk for atrocities, including arbitrary arrests, extrajudicial killings, rape and torture.

The scale of human displacement in 2017 will continue to strain the response capacity of the international community and drive record requests for humanitarian funding.

Host and transit countries will struggle to develop effective policies and manage domestic concerns of terrorists exploiting migrant flows, particularly after attacks in 2016 by foreigners in Belgium, France, Germany, and Turkey. In Yemen, for example, 82% of the population in need of humanitarian aid. Temporary cease-fires have allowed for some increased access for humanitarian organizations, but relief.operations are hindered by lack of security, bureaucratic constraints, and funding shortages. More than half the population is experiencing crisis or emergency levels of food insecurity. The Report noted throughout the link between international security and food insecurity.

Transnational Criminal Organizations

Transnational criminal organizations continue to pose a threat to the US and its allies, including Canada. The threat arises from the fact that they control parts of countries or a sector of the economy using violence and corruption of public officials. They facilitate terrorism by providing money and services to terrorist organizations, and are well-integrated in extortion and cyber-activities, as well as facilitators of illegal drug trafficking. Execution-style killing and general murder are part of the package. Well-known TCOs include the Mafia, Triads, Yakuza and Fuk Ching. Paying corrupt officials or cyber criminality is a function of money laundering.

The Report notes the growing concern of deaths from fentanyl that is trafficked by TCOs that has increased 73% compared to 2015. The Report notes the growing threat from China as the source country for synthetic drugs and the concern that such drugs are sold on the Internet.

TCOs are also of concern because they facilitate terrorism and engage in cyberattacks.

According to the Report, TCOs use home and other 24/7 surveillance systems and other means to hide and avoid detection. A typology of identifying a person who is in a TCO, therefore, is hyper-surveillance and security, as well as hyper-privacy.

One of the biggest threats from TCOs is the trafficking of drugs in the US.

The Danger of Technology

The Report identifies increased use of artificial intelligence as introducing new threats, in particular, enabling new military capabilities for adversaries of the US.

The Report notes that although the US leads in AI research globally, foreign countries research is growing. The risks of other countries surpassing the US in AI include making the US vulnerable to cyber attacks, difficulty in ascertaining attribution, facilitation of weapon and intelligence systems, risks of accidents and mass unemployment.

The Report notes that the development of genome-editing technologies can be used to fix medical, health, industrial, environmental and agricultural challenges and to revolutionize biological research. But the range of changes and its impact will be challenging as governments deal with ethics and the law to govern its uses.

Deploying smart devices into everything introduces vulnerabilities. There already has been cyber attacks using smart devices for DDoS attacks and that is expected to grow. The Report notes that there are vulnerabiities in self-driving cars and medical devices in respect of cybersecurity. And finally, the acquisition by China of US technology poses a risk. The Report noted that cybersecurity issues were growing in the medical sector with hacking undermining medical institutions.

The IoT connected to billions of new devices broadens the attack potential of bad cyber actors. Their deployment has also introduced vulnerabilities into both the infrastructure that they support and on which they rely, as well as the processes they guide. Cyber actors have used IoT devices for DDoS attacks, and will continue.

Genome Editing

Genome editing is also an international security risk. The low cost and growing availability of these powerful new techniques means untrained personnel will inevitably gain access to them, and lack of experience, disregard for codes of ethics, and ignorance of appropriate precautions all but guarantee dangerous outcomes. It also raises issues of biohacking of the technology and the potential for permanently and irreversibly altering the human genome without knowing what the full results might be. Subtle changes, for example, intended to affect only genetic diseases, could have unknown consequences, interfering with signaling pathways, altering immune responses, or even threatening the species itself.

Genome editing can be used for weaponization pathogens engineered for biological attacks could target individuals or groups; they could also be employed in large-scale attacks with devastating consequences. Additionally, they could be developed to strike the plants or animals that sustain our food supplies.

Gene editing techniques could produce new diseases, killing hundreds of thousands of people.

Terrorism

The Report discusses the threat of global terrorism from the Middle East and home grown terrorim as well from Sunni population, noting that homegrown terrorists will persist and happen with no warning. In 2016, there were 16 arrests for homegrown extreme terrorism and three deaths from such attacks in the US.

In respect of Syria, the Report believes that the Syrian government lacks the resources to defeat ISIS on its own. It notes the growing number of ISIS countries such as, through Boko Haram, Nigeria, Cameroon, Niger and Chad. ISIS is also a threat in Bangladesh, Afghanistan, Tunisia, Egypt, Lebanon and Yemen. In the latter country, the Report notes that 80% of the population needs humanitarian aid – a whopping 17 million people.

Turning a blind eye to money laundering now costs you in Canada

By Christine Duhaime | May 8th, 2017

In a surprise decision for Canada, an appellate court has reversed a lenient sentence for Jacqueline Garnett, the girlfriend of a drug dealer who was convicted of possession of proceeds of crime, and instead imposed a two-year conditional sentence, partially to be served under house arrest. While the new sentence is still light by global standards, the lower court had given the accused three years probation.

In August 2016, Ms. Garnett, was sentenced in Nova Scotia for laundering money. She banked millions of dollars for her boyfriend’s drug business, and lived off the avails of the proceeds of crime without reporting the proceeds as income or paying taxes. In her capacity as the person who banked her boyfriend’s money, Ms. Garnett washed the proceeds of crime at Canadian financial institutions.

While noting that it is illegal to receive the benefit of proceeds of crime, the lower court sentenced her to probation because the judge believed she was not likely to re-offend.

The Crown appealed the light sentence and on appeal, the appellate court held that the lower court’s decision was not appropriate, in part because it suggested that partners have a license to launder proceeds of crime.

In the case of Ms. Garnett, the court held that she knew her boyfriend was involved in illegality and was also aware that associates of theirs had been murdered for that activity. Consequently, her sentence was increased to house arrest and two year condition sentence. In increasing the sentence, the court of appeal held that a message must be sent to business and relationship partners that if you’re going to be involved in holding, moving or laundering the proceeds of crime, you can expect serious consequences.

By way of comparison, in other countries, money laundering sentencing is taken more seriously by the judiciary. Money laundering constitutes a serious national and international problem, and other countries endorse a sentencing structure that imposes substantial penalties for financial transactions which promote drug trafficking or other serious criminal activity or which obscure the origins of illicit funds.

In the US, for example a drug trafficker who is a first-time offender may be incarcerated for a 121- to 151-month period if charged and sentenced only for drug trafficking. His girlfriend would be incarcerated  for 46 to 57 months if charged and sentenced only for laundering the money from such drug trafficking.

Bank of China money laundering case in British Columbia seems to set new reverse onus precedent

By Christine Duhaime | April 30th, 2017

As part of the protracted litigation involving several defendants from China that we wrote about here, in which $480 million was stolen by the Bank of China by low level managers and parked in banks and real estate in Vancouver and spent at casinos in Las Vegas, the Bank of China has obtained a judgment for over $600 million against the mother and wife of Chao Fan Xu, one of the men who stole from the Bank of China. The case is very James Bond-like and for background, you can read about it here.

The two defendants were Fang Kuang, the wife of Chao Fan Xu, one of the bank managers, and Wen Jing Tan, the mother of Mr. Xu.

The decision is unusual in that according to the Reasons for Decision, the Bank of China, rather than establishing any of its own evidence in respect of money laundering of funds from China that went through Hong Kong to Vancouver, relied upon recycled evidence by US prosecutors from other proceedings in Nevada who prosecuted the relatives of the defendants for, inter alia, money laundering and pursuant to which Ms. Kuang was sentenced to 96 months incarceration and Mr. Xu to 300 months.

In that US prosecution, the US government obtained a restitution order against them for US$7.8 million in favour of the Bank of China. But only $20 million of the $482 million stolen by multiple defendants from the Bank of China was part of the US proceedings, so at maximum only $20 million was capable of piggy-backing upon US proceedings in Canada for evidentiary purposes. In other words, the US evidence that was solely relied upon to claim against the defendants was only in respect of $7.8 million, and yet it was used to support an alleged claim of laundered funds of $600 million.

The decision is also unusual in that an expert reviewed the bank records of the defendants and rather than finding evidence of money laundering, such an expert opined that there were mere “patterns of money laundering”, and while the Court admitted evidence from foreign proceedings, it rejected the most competent evidence of all by US anti-money laundering experts who deposed as to the matters in the US criminal proceeding.

The Court found, based on the US conviction (even though it rejected the evidence from American experts that led to the US conviction), that Ms. Xu assisted those who stole from the Bank to launder the funds from the Bank of China and was therefore liable to the Bank of China.

With respect to the mother, Ms. Tan, because she was not a party to US prosecution, the Bank of China had to rely on making its own case for money laundering in British Columbia, rather than rely on the US government evidence in the US prosecution. In that respect, it relied upon the opinion of evidence of a pattern of financial transactions that it believed were indicative of money laundering (rather than evidence of money laundering).

In any event, the Court made interesting observations about money laundering, namely that the objective of money laundering is to make it impossible to trace funds back to its illegitimate source.

But the objective of money laundering is to convert it from its original source so that the next organization involved in the layer in the movement of that money does not suspect its source, and ergo report it. Take for example, washing money by refining at a casino – if its money laundering then there is a predicate offence from whence the funds were tied and so there is no secret as to the source of the funds and neither is there a secret that the funds in this example were laundered at casino because the casino, as with all reporting entities, record and report the transaction.

The person, after refining, obtains a casino cheque which they then take to a bank for deposit. The bank in the example is not suspicious as to the source of funds because they see that, on its face, it is from a casino and involved winnings. Unless we are dealing with cash, it is not difficult to trace funds.

In any event, Ms. Tan was found liable to the Bank of China because she could not explain or prove that the money in her possession was not proceeds of crime, so a reverse onus was imposed upon her.

As a result, the two defendants were ordered to pay the Bank of China over $600 million collectively.

In terms of a precedent, the Supreme Court of British Columbia seems to have set precedent that it is permissible to rely solely upon evidence in foreign proceedings for cases of money laundering in the civil context to reclaim assets and secondly, that a reverse onus applies whereby a defendant must prove that money is their possession is not proceeds of crime.

It is not known whether the defendants appealed the case on the ground that it established new law in Canada in respect of the reverse onus, and its constitutionality.

Winnipeg man on welfare charged with importing Fentanyl with Bitcoin

By Christine Duhaime | April 18th, 2017

A cannabis activist has been charged with illegally importing Fentanyl from China to Canada, through Vancouver, and paying for it with Bitcoin. The Manitoba government is seeking to forfeit his assets as proceeds of crime. The defendant, Raymond Csincsa, is allegedly on welfare and alleges that the $4,780 in cash located at his home was from welfare cheques and gambling winnings. The Fentanyl was worth $14,000.

Four indicted in US cannabis tech pump & dump scheme that allegedly scammed investors and used Canadian promoters

By Christine Duhaime | April 18th, 2017

Four people connected with a company called BioCube Inc., with connections to Canada were indicted on Friday for securities fraud and two for money laundering. They are alleged to have defrauded the public securities market by making untrue statements, omitting to make material statements and intentionally deceiving investors  – in essence, for engaging in a pump & dump scheme to rip off shareholders through what they marketed as a cannabis tech company. One of the defendants held himself out to be a “professional anti-money laundering consultant” in Cyprus.

BioCube filed statements with securities regulators that it was in the business of importing wood from Brazil, and then pivoted and filed a statement that it made batteries, then pivoted again and filed a statement in 2016 that it was now a tech company focused on infrastructure with a plan to distribute a machine to detect cannabis.

A pump & dump scheme is one whereby a group of people inflate the share price by doing things such as making false and untrue statements, not filing statements with a securities commission, obtaining shares and not reporting it, receiving finders fees and not reporting it, or failing to file press releases. In a pump & dump scheme promoters who have shares in a junior company go out and promote it illegally until the price rises and then they sell their shares. The shares usually later drop since they were held up with false information and do not recover. According to the indictment, part of the pump & dump involved concealing the beneficial owners of the shareholders of BioCube. Pump and dumps are common in Vancouver among promoters and so-called finders – which are guys who go get investments from the same players for a startup and take a finders fee, often paid under the table. Such finders used to be in mining but have ventured into tech companies. Finders are often people in securities who are not licensed or qualified as a broker and because they are not licensed or qualified, they become finders. They are required to disclose that they act as finders and are paid part of the proceeds of a financing.

Pursuant to securities law, persons who are beneficial owners of shares (who directly or indirectly have voting power or investment power of 5% or more), are required to file a registration statement to disclose their shareholdings or interests therein. The FBI alleges that BioCube structured its transactions so that the beneficial owners of the shares were hidden in order to deceive the investing public.

We use Canadian stock promoters because US promoters follow the law

During conversations that were taped by the FBI, one of the defendants recommended using Canadian stock promoters for pump and dumps  for US listed companies essentially because US promoters follow the regulations (as opposed to Canadian promoters that one assumes do not),  and that Canadian stock promoters take 30% commission on pump & dump sales of securities (without, it would appear, disclosing it). According to other recorded calls, the indicted persons allegedly used shady connections in the Dominican Republic and Panama.

We can use a Canadian website because they don’t allow the government to break in

The defendants also discussed obtaining a Canadian domain because they believed that Canadian websites prevent governments from hacking them or obtaining emails. They subsequently are alleged to have discussed laundering the proceeds of BioCube share sales by opening bank accounts in foreign countries under corporate names that were untraceable to them and then getting debit and credit cards and spending the proceeds to avoid ant-money laundering reporting and FATCA reporting.

The defendants are charged with laundering $2 million through offshore bank accounts. The four are Chris Messalas, a former securities broker previously barred from the industry by the Securities and Exchange Commission; Boris Rubizhevsky, BioCube’s former chief executive officer; attorney Michael Garnick; and Dimitros Argyros, described as an “anti-money laundering consultant.” Messalas, Rubizhevsky and Garnick were charged with securities fraud conspiracy. Messalas and Argyros were charged with money laundering conspiracy.

Canada’s New Cannabis Act

By Christine Duhaime | April 17th, 2017

Canada introduced a new Cannabis law, Bill C-45, the Cannabis Act, expected to come into force in July 2018.

Part 1 – Background on Current Law, Illegal Dispensing; Denial of Bank Accounts

Illegality of Cannabis Sales Except for Medical Purposes

Until the Cannabis Act comes into force, it is illegal to sell or have cannabis except as authorized for narrow medical purposes. Cannabis is a prohibited drug under the Controlled Drugs and Substances Act similar to cocaine or opium (the latter are Schedule I and the former is Schedule II). Possessing cannabis illegally is an indictable offence which carries a term of incarceration of up to five years. To obtain cannabis for medical purposes involves a person receiving authorization from a doctor to buy a small amount for personal use from one of 42 federally licensed sellers, or to grow it themselves.

Stores known as dispensaries or compassion clubs in Canada are illegal, meaning they are not authorized to sell cannabis for medical or any other purposes. There is no so-called “grey” area in respect of the legality of dispensaries, cannabis stores or compassion clubs. Having a license from a City, or municipality, such as Vancouver, does not make a cannabis store or a dispensary “legal”, as municipal law does trump federal law.

Moreover, the cannabis products sold in stores, dispensaries and such are illegally supplied, and unregulated. The law in Canada does not permit stores, dispensaries and cannabis clubs to acquire cannabis supplies.

Until the Cannabis Act is brought into force, the only legal way to obtain cannabis is from one of the 42 licensed providers and only for legitimate medical purposes.

Except for the 42 licensed producers, it is illegal to advertise or promote the sale of cannabis. Promoting cannabis that is not authorized contravenes the Competition Act, among others.

Difficulty in Obtaining Bank Accounts

Cannabis storefront businesses often cannot get bank accounts and the reason is because only cannabis sold for medical purposes by one of 42 federally licensed providers is legal.

The indictable offence provisions that govern cannabis sales and distribution mean that the proceeds of sales that are illegal (occur at venues not federally licensed or regulated) are proceeds of crime, as that term is used in global money laundering law. Because they are proceeds of crime, financial transactions associated with those businesses, irrespective of the amount, are reportable to FINTRAC under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act as suspicious transactions by banks, credit unions, casinos, money services businesses, accounting firms, notaries, stock brokers and insurance companies.

It is very expensive for financial institutions to monitor, report, record and generally implement systems to comply with anti-money laundering law if they were to bank cannabis stores.

In addition, the Criminal Code of Canada makes it an offence for anyone, including banks, credit unions, directors, officers, law firms, or any entity to transfer, send, deliver, transport or deal with money that they know or believe is from the illegal sale of drugs (such as may occur if a cannabis transaction is not a licensed one). As a result, no law firm (and ergo no compliance officer at a bank) can reasonably sign off on an opinion to a bank that it can provide banking services to a cannabis store, dispensary, or compassion club that is not federally licensed.

Cannabis stores operate as all-cash businesses because they cannot get bank accounts and a typology for anti-money laundering compliance officers is large volumes of cash that cannabis dispensaries try to deposit at casinos, banks, money services businesses and such.

In this story on VICE, a person who owns a number of cannabis dispensaries alleges that a credit union called CCEC provides banking service to cannabis stores in Vancouver, despite the Criminal Code, Proceeds of Crime (Money Laundering) and Terrorist Financing Act and the Controlled Drugs and Substances Act and that the only way to accept credit cards as a merchant is to lie to an issuing financial institution (a criminal offence and an indictable offence under the Criminal Code). Lying to an issuing financial institution to obtain financial services involves lying to obtain an incorrectly coded merchant number (for example, coded as flower sales rather than drug sales) and is not recommended. In the US, officers and directors of Canadian companies who have lied to obtain merchant codes (usually in the online gambling business) have been prosecuted for money laundering and bank fraud and faced hundreds of years in jail.

It is not impossible to get a bank account in Canada for a cannabis business but it is difficult.

Filing Suspicious Transaction Reports on Cannabis Stores etc. 

People, including lawyers, cannabis entrepreneurs and others seem to be under a misapprehension that there are no suspicious transaction reports being filed to Fintrac in Canada or FinCEN in the US in respect of cannabis operations. There are numerous such filings taking place daily because, as mentioned above, the proceeds of sales from an unlicensed cannabis business is proceeds of the commission of a crime and must be reported by reporting entities. According to DSA (here), in the US, for example, between 2014 and 2015, 84% of American states filed cannabis related suspicious activity reports to FinCEN. And interestingly, there were 374 financial entities that filed including banks, credit unions, mortgage companies, stock brokers and casinos. Instances where a bank filed a suspicious transaction report include when it terminates a banking relationship with a cannabis company for anti-money laundering law purposes.

Money Muling to Vancouver

Because cannabis stores cannot get bank accounts, they move money across the country and from Canada to the US, and vice versa. In this story, the government arrested what is called a “money mule”, a person who moves money. In this case, the money was being muled allegedly for a cannabis chain called Canna Clinic. The alleged money mule was arrested with $590,000 cash (in $20 bills) being muled to Vancouver. The owner of the cannabis store allegedly informed CRA that $590,000 was being moved to Vancouver to pay its GST. The person with the money, however, told the police the money was his and he earned it selling videos. The $590,000 is subject to an action by the government for forfeiture as proceeds of crime allegedly tied to sales from the cannabis store – the cannabis store owners appear to corroborate that story by taking the position that it is for the payment allegedly of GST they owe. For the GST owed to be $590,000, as the cannabis store allegedly informed CRA, it means that the cannabis store’s gross sales in one store in Ottawa are $11.8 million every two weeks. That is not likely.

Online Prescriptions; Sale to Minors

Vancouver has stories of minors who attend at dispensaries and are sold cannabis, and of other stories of people “consulting” doctors online in a back room of a dispensary who write an online prescription for a person to buy cannabis for purported medical purposes. According to studies by the US, 11% of children aged 15 years old and older in Canada use cannabis, and for those between the ages of 15 – 24, in Canada the rate is 24%. Canada holds the record as the country with the highest percentage of minors who use cannabis.

According to this story, a former physician, Rob Kamermans, wrote over 15 prescriptions per day for cannabis over a one year period (4,000) to strangers he met on Skype across Canada. Physicians are licensed provincially, not nationally, and cannot practice medicine beyond provincial borders. He was charged with money laundering, fraud and forgery in connection with cannabis prescriptions and his medical license was revoked for incompetence.

Associations with Criminality

Dispensaries that are not federally authorized exist in many parts of Canada pursuant to which there appears to be little municipal enforcement to shut them down until recently when the federal government appears to have mandated a national plan to raid numerous cannabis dispensaries. Those raids are continuing, resulting in some decrease in the number of cannabis stores operating. As well, judges are being asked to ensure that employees, managers and owners of cannabis stores that are arrested and prosecuted are given criminal records. Having a criminal record will mean that those people cannot enter the cannabis business under the Cannabis Act.

This story describes how in Canada a person with a criminal record who was incarcerated, is operating cannabis stores across the country. In 2015, Canada’s Criminal Intelligence Service reported that over 50% of the 657 organized criminal groups in Canada are known or suspected to be involved illegally in the cannabis trade. A Canadian government member of Parliament said that “the decision to sell or not to sell to a child is often made by a gangster.”

Since 2013, the government has been concerned over the involvement of organized crime in the supply, distribution and sales of cannabis, recently noting that transnational criminal organizations, including the Hells Angels, are “behind most of the [illegal unlicensed] dispensaries.” And according to this story, a well-known Toronto man with alleged links to organized crime was involved in the cannabis business and even formed an association of cannabis dispensers.

In addition, Canada is the primary source of cannabis sales to the US originating from BC, Ontario and Quebec.

Because cannabis is illegal in all but one country over the globe, organized crime tends to run drug and cannabis operations. In Italy, typically this is the Mafia but there is also Chinese Mafia in Italy taking over cannabis cultivation and trafficking. The Italian authorities are also concerned with the increased evidence of terrorists, namely ISIS (the Islamic State), trafficking cannabis through North Africa and Italy, and funding terrorist activities using the financial system. In Mexico, drug cartels are adjusting to changes in historic cannabis sales. And here, the Nigerian Mafia traffic cannabis through the Ivory Coast, laundering the proceeds in bars and running prostitution services.

And now it would appear that foreigners, including Canadians, attempting to enter the US with any connection to cannabis, are apparently being denied entry to the US permanently, or deported.

US Enforcement

Several states in the US authorize medical and recreational cannabis use, although federal law prohibits it. The US government has said that it will leave medical cannabis use alone but will go after recreational uses that contravene federal law.

Both Colorado and Alaska recently backed away from plans for cannabis social clubs over concern with federal enforcement. 16 people last month in Colorado were indicted for money laundering and drug trafficking of cannabis, and their bank accounts seized. Banks are concerned with indictments because they invite AML compliance reviews and often AML fines for failures to report money laundering activities.

Last week, the US AG sent a memo to members of a task force focused on crime reduction and public safety asking for a review of existing policies of the enforcement of cannabis to reduce violent crime. The new Drug Czar, Tom Marino, is not in favour of medical or recreational cannabis. All signs seem to be pointing towards federal enforcement of recreational uses of cannabis, and consistent with the Executive Orders of January calling for the prosecution of members of organized crime and foreign nationals (Canadians and Mexicans in particular), engaged in the drug trade.

Bitcoin in the picture

The focus on Canada makes sense – in addition to Canada being a major source country to the US of cannabis, Canada is also a source country of fentanyl to the US, which is imported from China and paid for with Bitcoin (this US criminal complaint describes how fentanyl is imported to the US from Hong Kong and paid for with Bitcoin; here is another similar story of fentanyl being imported using Bitcoin). Here is a story of one of many Canadians, ironically a cannabis activist on welfare, who was arrested for importing $14,000 worth of fentanyl illegally into Canada from China and paid for with Bitcoin. Apparently, US law enforcement has been to Vancouver numerous times over the issue of Bitcoin and drug importations.

Part 2 – New Cannabis Law

Purpose

Clearly the existing cannabis system in Canada seems to have significant issues that need remediation.

Against the backdrop of the above, the purposes of the Cannabis Act are clear and they include more harsh measures to protect minors and to remove organized crime from Canada’s legitimate cannabis system.

The Cannabis Act is also designed to act as a world model, meaning that Canada’s goal is to show that legalizing drugs for recreational consumption can be done in such a way as to promote and protect the integrity of the system and respect the rule of law. There have been statements that the government will allow existing cannabis dispensaries to be registered even though they operated in violation of the law.

The purposes of the Cannabis Act are to:

  • make it a serious criminal offence to sale cannabis to minors;
  • make it a serious criminal offence to possess, sell, distribute, export cannabis without legal permission;
  • make it a serious criminal offence to promote, advertise, label or package cannabis to appeal to minors;
  • establish regulations and a registration system for cannabis that will determine who can enter the sector; and
  • to increase the penalties for drug-related offenses connected to cannabis.

Registration to Sell, Distribute

Under the Cannabis Act, the government will establish classes of registration including for selling, transporting, distributing, delivering, testing, producing and advertising of cannabis.

Disclosure of beneficial owners

In order to be registered, a legal person must disclosure its shareholders and controlling persons, whether indirect or direct – so beneficial shareholders, investors, those who hold pledges of shares and such will be relevant.

Integrity 

In order to address integrity issues affecting the market, a person will not be registered or licensed if they are associated with criminality, such that there is a risk of cannabis under their control being diverted to organized crime or illicit markets; they make false statements or omitted material information; they contravened the Controlled Dugs & Substances Act; or there are reasonable grounds to believe they contravened an order under the Controlled Drugs and Substances Act.

Other grounds for refusal include not getting a security clearance and circumstances when it is not in the public interest to register a person. Whether formerly operating a cannabis store in violation of federal law will disqualify a company or a person from being registered (because breaking the law is not in the public interest or rewarding a company or a person for years of breaking the law), has yet to be determined by the government. But that is the key issue.

Provincial control

The Cannabis Act allows the provinces to regulate the selling and distribution of cannabis if provincial regulation is consistent with the Cannabis Act. However, like gaming control legislation, the authority to operate a cannabis business will only be provincial – a company will not be able to operate across provincial boundaries absent the provinces entering into inter-provincial agreements. Unless the regulations say something different, companies will need to register in each province to operate there.

Distribution of Cannabis

Under the Cannabis Act, it is prohibited to distribute illegal cannabis, to distribute cannabis to a person under 18-years-old or to distribute cannabis to any person above a certain amount without being registered and authorized to do so.

Possession of Cannabis

Under the Cannabis Act, it is prohibited to possess cannabis above a certain amount, or to possess illegal cannabis.

Advertising of Cannabis

Under the Cannabis Act, it is prohibited to promote cannabis, or an accessory of it, or any service associated with it by communicate information about its price, in a way that would appeal to minors, to have testimonials, or to depict people or animals, or that includes emotions, glamour, excitement, vitality or daring.

It is also prohibited to include false or misleading advertising or comments in respect of cannabis.

And it is prohibited to advertise or promote cannabis outside of Canada or to sponsor events, or name a facility after cannabis – like a hockey arena or a one-off event, like a concert.

Selling to Minors

Under the Cannabis Act, it is prohibited to sell cannabis to a minor and it is also prohibited to sell cannabis or an accessory with an appearance that is appealing to minors.

Importing / Exporting

Under the Cannabis Act, it is prohibited to import or export cannabis without authorization.

Offences

Selling, distributing, importing or exporting cannabis to a person without being registered to do so, or selling to a minor, is an indictable offence (relevant for money laundering legislation) and carries a term of incarceration of up to 14 years.

The term of incarceration for possession is up to 5 years.

Regulations

The majority of the legislation refers key provisions to regulations, which because it is delegated legislation, means that they will be drafted without parliamentary review and/or approval. The material parts of the regulations will include the registration requirements.

“How to” text book by accountant on using offshore tax havens to avoid money laundering detection

By Christine Duhaime | April 7th, 2017

One of the most curious text books one can find in law libraries is a “how to” series of legal text books on how to select the best international tax haven for clients to hide their money. It’s curious because one would have thought that helping clients hide money is not what lawyers are permitted to do.

Called “Tax Havens of the World” and written by now-deceased accountant Walter Diamond, “Tax Havens of the World” provides a country-by-country guide that explains tax laws, banking laws, company law, financial crime oversight and bank account opening procedures.

The aim of “Tax Havens of the World” is to provide a “shopping guide” to select the best country to cloak one’s money and protect it from government control.

In “Tax Havens of the World”, Diamond describes the many benefits and advantages of tax havens and summarizes each of them. He describes their usefulness and explains why accountants and other professionals, as well as corporations, among others, should use them.

The key benefits, he writes, include:

  • to cloak foreign bank accounts in secrecy;
  • to shift investments without being taxed;
  • to give privacy to financial dealings and privacy over financial assets; and
  • to have no government control.

Mr. Diamond was particularly concerned with what he viewed as the growing oversight from anti-money laundering laws. He writes that offshore tax havens are the target of unfair “virulent attacks” by governments and accusatory tactics by the Financial Action Task Force.

For each country in the text book, Mr. Diamond describes things like the advantages of setting up trusts versus foundations and how to set up companies for anonymity so that no one can find out who controls those companies (who the legal and beneficial shareholders are). The book also describes the strength of each country’s anti-money laundering laws and its enforcement of those laws, as well as what must be disclosed to authorities if a person incorporates a company and parks money in that tax haven.

Despite what appears to be the questionable legality of some of the advice in respect of the use of offshore and other tax havens to cloak bank accounts and incorporate private companies in secrecy to avoid taxes and avoid anti-money laundering reporting, Mr. Diamond’s text books remain available.

“Tax Havens of the World” was updated annually until 2009. Mr. Diamond started out as a bank examiner and wrote text books for 25 years that promoted the use of tax havens to defeat law enforcement and government oversight.

Diamond was an accountant at Deloitte and KPMG, and a prolific teacher of the benefits of offshore tax havens, as well as an advisor to governments.

In global landmark case, majeava injunction for assets from China upheld in Court in Canada

By Christine Duhaime | April 1st, 2017

As reported in the Vancouver Sun (“Landmark ruling for Chinese bank”), a Chinese bank has won a landmark ruling against a Chinese foreign national who allegedly disappeared from China with an unpaid $10-million dollar loan in 2014, and quickly purchased four Vancouver-area homes.

Our firm, Duhaime Law, acted as counsel for the China CITIC Bank, a state-owned bank in China in the litigation to seek a mareava injunction to freeze assets and recover the loan.

China CITIC Bank won a freezing order (mareava injunction) against three luxury homes in Surrey last summer.

In B.C. Supreme Court in February, Shibiao Yan was ordered to comply with an arbitration ruling in China to repay China CITIC Bank for the loan he took out in 2014, as president of a company named Tanyuan Wood.

CITIC alleged that Yan and his wife Yahui Gao bought a Vancouver home and three South Surrey homes worth about $8 million in total over several months in mid-2014, shortly after he withdrew $10-million in one transaction from the bank’s line of credit.

“Based on … routine anti-money laundering due diligence, CITIC Bank believes that Mr. Yan and (his wife) Ms. Gao disappeared from China,” legal filings from the bank say.

Court documents say that Yan applied for the credit line from CITIC in June 2014. Yan incorporated the B.C. company TYMY Investments in March 2014, legal filings say, and his wife bought the $2.5-million Vancouver home a month later.

Yahui Gao still owns the Vancouver home where the family is believed to live, according to court filings. This home was not subject to the freezing order and is now assessed at $3.94 million.

The three Surrey homes bought in 2014 and originally subject to CITIC’s freezing order have been sold and “collection remains difficult,” according to Christine Duhaime, the Vancouver lawyer who obtained the so-called Mareva injunction against Yan’s B.C. assets.

In September 2016, Yan’s lawyer successfully applied to alter CITIC’s freezing order to exempt any bank accounts or property assets of TYMY Investments, Yahui Gao, or another person named Pengfei Luo, legal filings say. The order only applies to Yan’s money at an HSBC branch in Vancouver, a Scotiabank branch in Richmond, and a TD branch in Richmond.

“They said that the homes were owned by a trust, and that there is a beneficial ownership structure,” Duhaime said in an interview, explaining Yan’s application arguments. “And therefore other people like his wife were the owners, and he wasn’t. So CITIC bank wasn’t entitled to take the proceeds of the homes. The homes proceeded to be sold, because the court said … we don’t know that really he is behind this (home ownership.)”

B.C. court and corporate documents show that Shibiao Yan of 712 West 64th Avenue in Vancouver registered the company TYMY Investments Ltd., on March 7, 2014. On the same day Shibiao Yan ceased to be a director, records say, and two new directors were named — Yahui Gao and Pengfei Luo — both with mailing addresses at 712 West 64th Avenue.

Duhaime said CITIC’s court actions against Yan will continue.

Meanwhile, court filings from CITIC say that Yan and his company Tanyuan Wood are subject to numerous collection efforts in China.

“Mr. Yan has other creditors in China, who we understand have attempted to locate him. In the past, CITIC bank applied to freeze the property of the Mr. Yan in China … including real property, and learned his properties were frozen by other creditors.”

CITIC’s filings say that in December 2014 Yan sold his Tanyuan shares worth about $6.5 million in breach of their loan agreement. In July 2016 CITIC attended Tanyuan’s office site and found “there are not 35 employees employed at Tanyuan Wood, as alleged by Mr. Yan — there are zero employees employed at Tanyuan Wood.”

Duhaime said that Yan is in Canada on a visitor’s visa.

Court filings from CITIC say that the bank’s anti-money laundering and international asset collection office undertook a global search, in 2016 a private investigator collected a number of documents outside the 712 West 64th home of Yahui Gao, including a “destroyed HSBC Premier World MasterCard,” in the name of Shibiao Yan, torn letters from Scotiabank in Richmond informing Yan and Gao that their accounts would be moved to a new branch, and a torn bank draft from Toronto Dominion Bank in Richmond for $400,000, payable to Ms. Gao.

There was also a torn note that included the words Tan Yuan, which said “until the official investigation to find out the true facts I naturally will return to carry on business,” legal filings say.

US rates Canada once again as a “major money laundering country” in annual drug report

By Christine Duhaime | March 12th, 2017

1. Canada once again a “Major Money Laundering” country

The 2017 “International Narcotics Control Strategy Report” (INCSR) published in March 2017 by the U.S. Department of State identifies Canada once again as a “major money laundering country” along with a host of mostly risky countries for financial crime such as Afghanistan, Argentina, Brazil, BVI, Cayman Islands, Cambodia, China, Columbia, Cyprus, Dominican Republic, Guernsey, Jersey, Iran, Iraq, Libya, Mexico, Macau,  Saudi Arabia, Somalia and the UK.

A “major money laundering country” is one whose banks and financial institutions allow financial transactions involving significant amounts of proceeds of crime. For several years in a row, Canada has been identified as such (see our other annual reviews here (2016), here (2014), here (2013) and here (2012)).

There is lots that is new in the 2017 INCSR for Canada, as described below, showing that the drug trade and consequently, the money laundering landscape, has changed in one year but one theme is that there are more concerns raised between Canada and China – in particular, fentanyl, proceeds of corruption landing in Canada and bulk cash smuggling.

Lots has been removed about Canada that isn’t completely justified in the sense that the needle has not moved over our record for battling, deterring and prosecuting financial crimes, and the risks identified in the earlier Reports are still relevant. However, one can get a complete view of the risks to banks and other reporting entities in a compliance sense from reading the summaries of 2012, 2013, 2014, 2016, linked above, and this 2017 summary, collectively, in preparation of a risk-assessement and on boarding purposes.

The good news though is that compared to previous INCSRs, Canada has improved and the weaknesses are more siloed.

2. What’s new in 2017 INCSR for Canada compared to 2016 report

Money laundering from tax evasion & corruption; lax conviction rate

According to the Report this year, money laundering in Canada is originating from tax evasion, corruption, as well as the usual drug trafficking, fraud, and such. And the main methods of money laundering have shifted to include Bitcoin, offshore corporations, bulk cash smuggling, money services businesses and real estate.

The Report mentions the exemption of lawyers as a deficiency in the anti-money laundering regime.

The Report says Canada should enhance enforcement and convictions for money laundering.

China

A lot was changed about China in relation to Canada this year in the Report, curiously. However, this year’s report says that the main source of proceeds of crime from China is from corruption involving state-owned enterprise and that criminals are laundering money mostly by bulk cash smuggling, fake large international trade invoices (trade-based money laundering), gambling and real estate.

Fentanyl entering Canada from China by mail

The Report states that fentanyl is originating in China and entering the US via Canada or Mexico, making Canada a source country. The fentanyl that enters Canada from China is by mail. Heroin is being altered with low-cost synthetic opioids, especially fentanyl, by drug dealers which can be 25 to 50 times more potent than heroin. Fentanyl is also pressed into pill form and sold as counterfeit prescription opioid pills. Drug takers are not aware of the large quantities of fentanyl, causing thousands of overdoes fatalities in Canada and the US.

Opium coming to Canada from Afghanistan

Afghanistan is the major supplier of opium derivatives to Canada and Europe. Insurgent groups in Afghanistan generate revenues by taxing drugs passing through regions they control [before the drugs reach Canada].

Meth produced in large quantities in Canada

Alpha-phenylacetoacetonitrile, the pre-cursor for methamphetamine, has been found in large quantitates in Canada.

Stay away from the Dominican Republic

Perhaps as a sobering thought for Canadians not to visit the Dominican Republic, the Report says that there is corruption in the Dominican Republic among the military and law enforcement agencies and it remains a significant impediment to law enforcement efforts, noting that the prosecution of corrupt officials rarely happens. Moreover, the judiciary is politicized and accused of corruption. According to the Report, the legal system offers little recourse to those who lack money or influence (e.g., can’t buy their way out). The FIU is not effective but if there is some good news, it is that the Report notes that the US has been effective in extracting criminals from the Dominican Republic to the US for prosecution.

Canada used for Laundering Funds for a Listed Terrorist Group and for Organized Criminal Gangs from China, Mexico & Columbia

Also noted was that a transnational organized crime group affiliated with Altaf Khanani from Pakistan uses Canada and other countries such as UAE and Australia, to launder billions of dollars in proceeds of crime every year for crime gangs from China, Columbia, Mexico and for the listed terrorist organization, Hezbollah. According to the Report, Altaf Khanani has also moved terrorist funds for the Taliban.

3. Key Findings

Volume 1 - The key findings of Volume 1 on the drug trade vis a vis Canada are:

  • Large amounts of fentanyl from China enter Canada by mail.
  • Canada is a major producer of precursor chemicals used in the production of illicit narcotics, along with Afghanistan, Bangladesh, Brazil, China, Columbia, Dominican Republic, Egypt, Iraq, Mexico and several other countries.
  • Cannabis destined for the US is produced mostly in British Columbia, Quebec and Ontario.
  • Canada is a primary source country of high potency marijuana and estasy to the US.
  • Canadian synthetic drugs and amphetamine stimulants are exported to the US, Asia and Australia.
  • Cocaine continues to enter Canada from South America and Mexico, some of which is transited through the US.

Volume 2 - The key findings in respect of money laundering  in Volume 2 for Canada are:

  • Money laundering activities in Canada are primarily from tax evasion, corruption, illegal drug trafficking, fraud, piracy and tobacco smuggling.
  • Laundering methods in Canada have changed slightly and now involve smuggling, money services businesses, casinos, real estate, wire transfers, offshore companies, credit cards and digital currencies like Bitcoin.
  • Also noted was that bulk cash smuggling into Canada is “widespread”.
  • Gangs from Vietnam are a significant source of illicit funds.

SEC denies approval for Bitcoin Trust over multiple market integrity issues

By Christine Duhaime | March 11th, 2017

The Securities Exchange Commission has denied an application for the creation of a Bitcoin Trust based primarily on issues related to preservation of the integrity of the capital markets.

The decision is what was expected from a financial crime and integrity perspective.

The decision can be read here. The gist of the negative findings of fact that formed the basis of the decision are that:

  • There is no regulation or oversight for the worldwide market of exchanges used to trade Bitcoin; 
  • There are few (if any) Bitcoin exchanges anywhere that are regulated for fiduciary and custodial activities);
  • The price of Bitcoin is dominated by activities in China; and
  • The bulk of trading of Bitcoin occurs outside of the US where there is no regulation in place.

It remains true that Bitcoin can be bought, sold and transacted upon with complete anonymity and thus, its activity is inconsistent and irreconcilable with the obligations for transparency and integrity of the capital markets.

Unless we are dealing with a closed micro exchange (which no one has yet established), it is impossible in an environment of anonymous wallet holders, to comply with anti-money laundering and counter-terrorist financial law, or sanctions law.

Bitcoin exchanges have also said on many occasions that they are unable to freeze any account of Bitcoin that is suspected, or know to be, terrorist property because they allege that only a holder of a Bitcoin wallet can access and control its activities. For example, they go further and allege that if a private key is lost by a wallet holder, there is no way to recover the funds invested to buy Bitcoin, and thus, for capital markets, this also an impediment to market regulation as it results in unjust enrichment of the Bitcoin exchanges and it makes the exchanges incapable of complying with terrorism and sanctions laws prohibiting the dealing of terrorist property.